Opening the Window Wider

When a U.S. bank wants to raise cash, it can sell some Treasury bonds, issue certificates of deposit, or repatriate Eurodollars from its branches overseas. If it is a member of the Federal Reserve System, it can also appeal to "the lender of last resort"--the system's discount window. The price is high. Besides paying interest, currently 51%, the bank must submit to scrutiny that is even closer than usual. As a result, only 1% of credit extended to the banks has been passing through the Fed's discount window in recent years.

This is almost certainly going to change. A study by a committee of the Federal Reserve last week outlined new rules aimed at liberalizing lending policy. Under its proposals, member banks would be granted a "basic borrowing privilege" at the Federal Reserve, which they could use with few questions asked. How much this will amount to for each of the banks and how frequently they will be allowed to make use of it remains to be settled.

Luring Them Back. The automatic borrowing privilege is a bone offered to smaller banks, which have been easing out of the reserve network. Since 1949, the Federal Reserve System's membership has dwindled from 6,923 to 6,044. Some banks may be lured back by easier borrowing rights. Another move to cast a wider federal net would be the creation of special "seasonal borrowing privileges" for small banks in agricultural and resort areas.

The study also proposes that the Federal Reserve discount rate be made more flexible to keep in line with other money-market rates. The rate could be changed as often as once a week, said Federal Reserve Board Governor George W. Mitchell, who headed the board's study group of ten. In the recent past, discount-rate changes were watched chiefly by foreign central bankers for evidence of U.S. resolve to tackle its balance of payments deficit. In the past nine months the rate has been upped three times, from 4% to 51%. This was interpreted abroad as an encouraging sign of stringency in U.S. monetary policy.

More liberal use of the federal discount window, even at the rate of more than $2 billion a week desired by the Mitchell study, will mean a shift in the way bank credit is extended. It will not increase the overall money supply, just de-emphasize the Fed's buying and selling of Government securities to regulate the flow of money, which has not always been fully successful when the chips were down. It took several months during the 1966 credit crunch to improve bank lending by such means alone. "If the proposed revisions had been in effect," says a Federal Reserve Board official, "we could probably have moderated the very fast rate rises."

The new proposals will still have to run a gauntlet of banking critics before they can be approved by the full seven-member Federal Reserve Board. Senator William Proxmire's congressional Joint Economic has already scheduled on the report.

This file is automatically generated by a robot program, so reader's discretion is required.